Tim Armstrong's Baby Shouldn't Have Become AOL's

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”Read More.

Yesterday's New York Times had a pretty brutal column from David Carr, predicting the imminent demise of Patch, the local news service that AOL Inc. bought in 2010. Carr calls the service "a black hole for cash" and concurs with outside investors that it was never a viable business. AOL Chief Executive Officer Tim Armstrong disagrees, but I have to side with Carr on this one: The reason Patch has lost hundreds of millions of dollars to date is that it's not a good business model.

That's ironic, because hyperlocal news isn't necessarily a bad business to be in; small-town newspapers are arguably faring better than small-city papers. Small-town papers don't have as much competition from Craigslist Inc. for classifieds, and people still buy them to see their kid's name on the honor roll or a picture of their church pageant.

But that sort of local news doesn't scale. You have to have reporters to write the stuff and ad salesmen to sell advertisements to small businesses, but once you've written the story and sold the ads, there's a limit to how much you can sell in small towns and cities. In larger areas, you have more scale -- but also much, much more competition from people who were running a lot leaner than Patch was. Yes, you save something by being able to provide business services and information technology centrally. But you also lose some efficiencies to bureaucratization in a large organization. The core problem remains: Local news doesn't scale that well. Which means that there's not much benefit to linking a lot of local sites together on a single, large service.

Jeff Bercovici argues -- correctly, I think -- that Armstrong's obsession with scaling up Patch rapidly doomed the site. But in some ways, this was inevitable. It's hard for a big organization to do things on a micro scale -- hard to keep managerial focus on such projects, hard to sell it to investors.

What this probably means is that AOL should never have bought Patch in the first place -- at least not until it had organically grown to the point where it made sense for AOL to own it. But the project was Tim Armstrong's baby from the beginning -- he helped create it when he was still at Google Inc. -- and it's hard to abandon your kids.

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Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”Read more